Sunday, December 4, 2011

Exchange rates and WTO

The relationship between exchange rate volatility as well as undervaluation and over-valuation of currencies with international trade has been discussed in this earlier blog. The interplay in the multilateral trading system has consequences for the extent to which WTO can intervene in the matter since the IMF is perceived as the international institution to address issues related to exchange rate volatility and currency valuation.

Lucas Ferraz, Emerson Marcal and Vera Thornstensen have argued in Vox Eu that WTO should play a more proactive role in addressing exchange rate misalignments. They conclude by linking it to a violation of the MFN status that is the cornerstone of multilateral trade jurisprudence by stating,

This reality brings into question the effectiveness of the MFN principle established by GATT Article I, that “any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” Persistent exchange-rate misalignments cannot but create potentially infinite variations of market-access conditions among WTO members. This situation is directly the opposite of what the multilateral system sought with the establishment of the MFN principle.

The effects of misalignments are also distorting many other rules and instruments negotiated under the WTO, such as antidumping, subsidies, safeguards, rules of origin, GATT articles I, II, III, and XXIV.
The WTO can no longer ignore what is happening behind its magnificent structure of complex trade rules. The persistence of opposite exchange-rate misalignments, of countries with overvalued currencies and others with undervalued ones, for long periods is eroding the multilateral trading system. The WTO cannot remain silent to such reality. The core principles of its construction – transparency, predictability and confidence – are under question. The strengthening of trade rules, with the negotiation of instruments to neutralise the effects of exchange rates, is fundamental to the existence of the WTO. Otherwise, the WTO might become a diplomatic-juridical fiction – void of economic reality."

A detailed study of the complex relationship between trade and exchange rate fluctuation has been rather cautious of the relationship. Robert Staiger and Alan Sykes have expressed, in the context of China's exchange rate policy their doubts as to whether this would amount to violation to WTO commitments.

It would be interesting to see the Dispute Settlement Body of the WTO adjudicating on this issue if a member were to bring it up before the Panel.

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